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Cho Hung Bank v. Kim

June 25, 2003


On appeal from Superior Court of New Jersey, Chancery Division, Bergen County, F-4148-00.

Before Judges Kestin,*fn1 Fall and Landau.

The opinion of the court was delivered by: Landau, J.A.D.


Argued May 14, 2003

This is an appeal from an order of the Chancery Division, Bergen County, dated June 21, 2002, denying a R. 4:50-1 motion filed by defendants Ki Sung Kim and Kwi Ryung Kim to vacate an amended default judgment for foreclosure entered on behalf of plaintiff Cho Hung Bank on March 19, 2002.*fn2 The judgment foreclosed"the mortgage premises described in the complaint" filed under Docket No. F-4148-00 by plaintiff against defendants respecting premises designated as 39 Brodil Court, Closter, New Jersey, Lot 35, Block 247. The mortgage described in the complaint was dated February 10, 1993, and secured a $150,000 note executed by defendants. Several other mortgages on the same property, securing an aggregate sum of $560,000 on notes between the same parties, were expressly subordinated to the February 1993 mortgage. The latter mortgage recites that the mortgagors were"Ki Sung Kim and Kwi Ryung Kim, his wife, individuals residing at 39 Brodil Court, Closter, New Jersey 07624," but also included an assignment of rents clause"[i]f the property is a rental property."

Supported by certification, defendants' motion to vacate asserted that the mortgaged premises consisted of a single parcel residence occupied by defendants and their four children, and that the Fair Foreclosure Act (FFA)*fn3 had been violated by plaintiff. Their moving papers pointed out that the Foreclosure Unit had initially issued a return notice addressing inter alia, plaintiff's failure to comply with the FFA, presumably by reason of the property's apparent residential nature, and the complaint's omission of the representation of compliance with the Act required by N.J.S.A. 2A:50-56(f). Subsequently, plaintiff's then counsel filed a certification, essentially stating that the FFA was inapplicable in that"this is rental property owned by the debtor, which was security for a commercial loan made to the defendants' business," and that,"[i]t is not owner-occupied residential property." The property was cleared for foreclosure by the Foreclosure Unit, and, as noted above, the subject amended foreclosure judgment was entered on March 19, 2002, reciting an amount due that substantially exceeded the amount requested in plaintiff's initial complaint and contained in the earlier foreclosure judgment of March 19, 2001.

Defendants' motion also argued that the judgment was void ab initio because the complaint and foreclosure action filed in March 2000, violated the automatic stay provisions of 11 U.S.C.A. Sec. 362(a), contended to be in effect until their then pending bankruptcy case, initiated in 1999, was closed on January 25, 2002.

The motion judge rejected the bankruptcy stay argument as inapplicable under the facts, because defendants received a discharge on December 10, 1999. Recognizing that defendants had not set forth their ability to satisfy the mortgage obligations, the judge did not presume to resolve the factual issue of whether defendants resided in the mortgaged premises. Rather, assuming for the purposes of the motion that defendants did reside in the subject property, she concluded that plaintiff had substantially complied with the purposes of FFA in any event, and that, coupled with the absence of defendants' demonstrated ability to pay the secured obligations or to dispute those obligations, and their sophistication in business and commercial matters, there was an insufficient basis to afford R. 4:50-1 relief from judgment.

We reverse and remand because there were sufficient material defects in the course of the foreclosure proceeding and the resulting default judgment to require that the judgment be vacated under R. 4:50-1.


R. 4:50-1 relief from judgment is not to be granted lightly. Ordinarily, denial of such relief will be left undisturbed absent a clear abuse of discretion. In re Guardianship of J.N.H., 172 N.J. 440, 473 (2002). Relief is more liberally granted, however, when the application is to vacate a default judgment. Marder v. Realty Construction Co., 84 N.J. Super. 313, 318 (App. Div.), aff'd, 43 N.J. 508 (1964). If a judgment is void and, therefore, unenforceable, it is a particularly worthy candidate for relief (R. 4:50-1(d)) provided that the time lapse is not unreasonable and an innocent third party's rights have not intervened. See Berger v. Paterson Veterans Taxi Serv., 244 N.J. Super. 200 (App. Div. 1990); Pressler, Current N.J. Court Rules, comment R. 4:50-1(d) (2003), and cases there cited.

Neither egregious time lapse nor rights of third parties are a bar to relief in the present case. We therefore examine first whether, as argued by defendants, the judgment was void ab initio because the foreclosure suit was initiated while an automatic bankruptcy stay was in effect.


Defendants filed for Chapter 7 bankruptcy relief in the Southern District of New York on August 23, 1999, thus initiating the automatic stay provisions of 11 U.S.C.A. § 362(a)(1) and (4)*fn4 against commencement or continuation of actions to recover pre-filing debts or claims, and enforcement of liens against property of the estate. Relief from the automatic stay may be secured upon application to the Bankruptcy Court to the extent permitted by 11 U.S.C.A. § 362(d). Significantly, on January 18, 2000, after defendants received their discharge in the bankruptcy action on December 10, 1999, plaintiff deemed it necessary to secure such relief from the stay order in order to foreclose another of defendants' properties, but did not apply for similar relief from the stay as it applied to the 39 Brodil Court mortgage.

Absent such an order of relief, or Bankruptcy Court action approving abandonment or exemption of the subject property, defendants correctly assert that the stay was in effect until the bankruptcy case closed in January 2002. The motion judge relied upon 11 U.S.C.A. section 362(c)(2)(C) in concluding that the discharge of the debtors in the bankruptcy action in 1999, resulted in lifting the automatic stay. That reliance was misplaced, however, in that section 362(c)(1) states:"[e]xcept as provided in subsections (d), (e), and (f) of this section [not here applicable]-(1) the stay of an act against property of the estate under subsection (a) of this section continues until such property is no longer property of the estate...." (Emphasis provided.)

There is sound reason for the difference in treatment. The trustee and creditors interested in the estate are rightly entitled to have notice, by way of application to the Bankruptcy Court, of a request to lift the stay, particularly where it is not readily determinable whether the bankrupt's equity exceeds the amounts secured by the mortgaged property, after allowance of any statutory exemption. Adequate protection to a lien holder against possible diminution in the value of the secured property is provided by its opportunity to move for lifting the stay, as plaintiff did with another of defendants' mortgaged properties after discharge.

All proceeds in excess of the secured creditors' interest, of course, belong to the estate. Indeed, even lifting the stay does not constitute an abandonment of the property. Catalano v. C.I.R., 279 F.3d 682, 686 (9th Cir. 2002).

As pointed out in Epstein, Nichols & White, Bankruptcy, § 3-1, at 63 (1992),"any action that violates the stay is void or voidable so that any non-bankruptcy consequences diluting the rights of the debtor or the estate are deemed ineffective, including the transfer of rights in property that the stay protects."

It is, of course, true that the 1999 discharge of defendants in their Chapter 7 proceeding relieved them of any further personal debt under the instruments securing their obligations, while preserving plaintiff's secured rights in rem against the mortgaged property. Party Parrot, Inc. v. Birthdays & Holidays, Inc., 289 N.J. Super. 167, 174 (App. Div. 1996). However, as we will discuss more fully below, the record was and is anything but clear as to the actual extent of defendants' obligations, both at the time of entry of default judgment and when the R. 4:50-1 motion was decided.

It suffices to say for purposes of our resolution of the bankruptcy stay issue, that the amount set forth in the judgment, although not recoverable against defendants personally, constituted the measure for determining whether there remained an interest of the estate in the property over and above defendants' relatively modest statutory exemptions. To the extent that the amount of the judgment was properly open to question, the trustee and creditors should have been made aware, by way of formal application in the bankruptcy court, that a property with possible estate equity might be foreclosed and sold to third parties.

Absent abandonment of the property, or action by the Bankruptcy Court to lift the stay, such as that in its January 2000 order, it remained in effect until the bankruptcy case was closed in January 2002.

We acknowledge that while"the dominant, general rule is that any act or occurrence that violates the stay is void ab initio," Epstein, Nichols & White, Bankruptcy, supra, § 3-32, page 155, a"handful of courts," ibid., page 160, have held that violations of the automatic stay are merely voidable. Citing In re Schwartz, 954 F.2d 569, 571 (9th Cir. 1992), the treatise concludes that"the voidable rule lacks any substantial reason or policy to support it...."

As we believe that the motion judge mistakenly relied upon § 362(c)(2)(C) in concluding that the stay was no longer in effect, a reasonable deference to the bankruptcy statute and to prevailing federal court interpretations would render void the judgment from which relief was sought. In turn, this would suggest applicability of R. 4:50-1(d). Even if merely voidable, however, the questionable reliability of the dollar amount in the judgment should have precluded its entry, and dictated the grant of R. 4:50-1 relief to reopen the judgment.

Another option in the R. 4:50-1 proceeding would have been to employ the method ordered in G.E. Capital Mortgage Services, Inc. v. Weisman, 339 N.J. Super. 590 (Ch. Div. 2000). There, the court directed the mortgagee to institute a new notice of intention to the mortgagors. In the present case, as the bankruptcy matter was closed in January 2002, that would have had the effect of avoiding any issue respecting operation of the bankruptcy stay, as well as affording opportunity to clarify ...

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